In Madoff We Trust

As the multi-billion dollar Ponzi scheme orchestrated by Wall Street insider
Bernard Madoff unravels in the media spotlight, the nation is being presented
with a rare opportunity to understand the true nature of many of our most cherished
financial structures. Hopefully we have the wisdom to connect the dots.

Although the $50 billion loss engineered by Madoff is truly a staggering accomplishment
(and was done using old-fashioned fraud rather than the mathematical wizardry
that has characterized Wall Street's recent larcenies) the size of the scheme
pales in comparison to the multi-trillion dollar Ponzi structures run by the
United States government. In fact, rather than looking to jail Madoff, President-elect
Obama should consider making him our new Treasury Secretary. If not that, at
least make him the czar of something!

Madoff's inspiration came from Charles Ponzi, the Italian-born American immigrant
who promoted an investment plan in the early 1900s' that traded postal coupons.
Rather than paying investors from legitimate investment returns, Ponzi hit
upon the innovative idea of paying out early investors with money collected
from new investors. By creating an illusion of success, interest in his investment
plan ballooned. Over time the schemes have become known by many other names,
such as chain letters or pyramid schemes. They are united by the fact that
they always fail in the end.

When the influx of new investors inevitably slows to the point where distributions
to current investors can no longer be maintained, investors look to withdraw
funds. When this happens, the entire structure falls apart. The profits received
by those who "invested" early as well as any funds skimmed off by the promoter,
are offset by all the losses of those who came late to the party.

To a large extent, the same concept has driven the major asset bubbles of
the last decade. Given the ridiculously high valuations seen by tech stocks
and real estate during their respective booms, the only way the bubbles could
be perpetuated was if newer "investors" could be found to pay even more outrageous
prices (the greater fool). But when these new buyers balked, the whole structure
crumbled. Although there was no Ponzi or Madoff to orchestrate these manias,
the entire financial and economic apparatus of the country had successfully
convinced the public that "investments" in tech stocks and condominiums were
bullet proof and that the supply of new buyers was endless.

Unfortunately, the Ponzi economy doesn't stop there. A chain letter is no
more viable when run by governments than when run by private citizens. However,
government orchestrated pyramids have the advantage of required participation.
As a result, they can maintain the illusion of viability for several generations.
But the longer such schemes operate the larger will be the losses when they
ultimately collapse.

The Social Security Administration runs its "trust funds" with precisely the
same methods used by Madoff and Ponzi. As money is collected by from current
workers, the funds are then dispersed to those already receiving benefits.
None of the funds collected are actually invested, so no investment returns
are ever generated. Those currently paying into the system are expected to
receive their returns based on the "contribution" made by future workers. This
is the classic definition of a Ponzi scheme. The only difference is that Ponzi
didn't own a printing press.

The United States Government runs its own balance sheet based on the Ponzi
principal as well. Our national debt always grows and never shrinks. As existing
debt matures, proceeds are repaid by issuing new debt. Interest payments on
existing debt are also made by selling new debt to investors. The whole scheme
depends on an ever growing supply of new lenders, or the willingness of existing
lenders, to continue to roll over maturing notes. Of course, as was the case
with Madoff, if enough of our creditors want their money back, the music stops
playing.

In Madoff's case, the rug pulling was provided by the huge financial losses
suffered by some of his clients in other non-Madoff investments. When enough
of these clients looked to sell some of their apparently well-performing Madoff
assets to help offset such losses, the scam collapsed. The same thing could
befall the United States Government. Now that China and our other creditors
are looking to spend some of their U.S. Treasury holdings to stimulate their
own economies, look for a similar outcome with even more dire implications.

The main difference is that while Madoff took elaborate steps to conceal his
scheme, the U.S. government operates in broad daylight. It truly is amazing
how faith in government is so pervasive that many can believe that politicians
will succeed where private individuals fail, and that governments are somehow
immune to the economic laws that govern the rest of society. Like those unfortunate
to have been duped by Madoff and Ponzi, the world is in for a rude awakening.

For a more in depth analysis of our financial problems and the inherent dangers
they pose for the U.S. economy and U.S. dollar, read my just released book "The
Little Book of Bull Moves in Bear Markets." Click here to
order your copy now.

For an updated look at my investment strategy order a copy of my new book "Crash
Proof: How to Profit from the Coming Economic Collapse." Click here to
order a copy today.

Mr. Schiff is one of the few non-biased investment advisors
(not committed solely to the short side of the market) to have correctly called
the current bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S. stock market,
commodities, gold and the dollar, he is becoming increasingly more renowned.
He has been quoted in many of the nations leading newspapers, including The
Wall Street Journal, Barron's, Investor's Business Daily, The Financial Times,
The New York Times, The Los Angeles Times, The Washington Post, The Chicago
Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle,
The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer,
and the Christian Science Monitor, and has appeared on CNBC, CNNfn., and
Bloomberg. In addition, his views are frequently quoted locally in the Orange
County Register.

Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in finance and
accounting from U.C. Berkley in 1987. A financial professional for seventeen
years he joined Euro Pacific in 1996 and has served as its President since
January 2000. An expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial newsletters
and advisory services.